The National Bank announced the completion of the first stage of stress testing of the largest Ukrainian banks. According to preliminary results, their stability is not a concern, and the assessment of asset quality is consistent with reality. That is, most of the tested banks adequately reflect the potential losses of loan portfolios and form reserves for the depreciation of issued loans.
The NBU explained that as a result of assessing the quality of assets, the total adjustment to credit risk amounted to about 1% for all banks. At the same time, increased requirements for capital adequacy standards may arise only for a few institutions, most of which already have a sufficient capital reserve, including from accumulated profits.
The National Bank plans to conduct the second and third stages of stress tests by the end of December. But, apparently, there will be no surprises, and none of the banks will lose their license. What the first stage of stress testing showed, I studied .
Why are stress tests needed? NBU began stress testing of banks in the spring of 2023. The National Bank came to the attention of the 20 largest institutions (15 of them are systemically important banks), the total volume of net assets of which exceeds 90% of the assets of the entire banking system.
In particular, these are PrivatBank, Oschadbank, FUIB, Sense Bank, Ukrgasbank, OTP Bank, Taskombank, MTB Bank and others.
The NBU chose April 1, 2023 as the starting point for the assessment. As of this date, the total volume of assets of the tested banks was UAH 2.6 billion, the volume of funds of individuals placed in these banks was UAH 911 billion, and the loan portfolio was UAH 605 billion.
According to the NBU, stress testing will allow us to analyze the impact of the war on the banking market and on the quality of assets, as well as verify the ability (or inability) of banks to compensate for losses.
After the stress tests, the National Bank may require individual market participants to develop additional capitalization programs and intensify efforts to clear loan portfolios of toxic loans (NPL). If one of the banks has a particularly precarious financial situation, the NBU has the right to apply measures of influence, up to and including revoking the license.
By the way, during the second and third stages of stress tests, the National Bank will monitor banks’ compliance with N2 and N3 standards. This is the regulatory capital adequacy ratio N2, which must be at least 10%, and the fixed capital adequacy ratio N3, which must be 7% or more.
However, taking into account the situation in the economy, the NBU does not require that all tested banks comply with these standards. They will have time until April 2026 to squeeze H2 and H3 into the required framework (if someone, of course, does not fit into these frameworks).
How do banks comply with regulations and clear NPL ? The National Bank is not lying when it says that the banking sector exudes vigor and cheerfulness.
Yes, many of them experienced an accumulation of toxic loans during 2022 and the quality of their loan portfolios deteriorated. But banks actively formed reserves for NPL and, at the same time, covered their losses through growing income from investments in government bonds and certificates of deposit.
As a result, already in 2023, reserve volumes decreased significantly, and the profits of the banking system increased sharply.
Here are just some numbers. At the end of 2022, the net profit of the banking sector amounted to UAH 22 billion. Over the 10 months of 2023, banks earned a net UAH 110 billion. That is, exactly five times more than for the entire 2022.
In addition, in 2022, banks formed reserves in the amount of UAH 121 billion, and the share of NPL in their portfolios increased by 8 percentage points over the year. up to 38%. In 2023 (over 10 months), the volume of reservations fell more than 20 times to UAH 5 billion. True, the share of problem loans decreased slightly over the same period, by only 0.25 percentage points.
The fact is that clearing NPL is a long and difficult process. Moreover, the reduction in toxic loans occurs mainly due to the write-off of non-performing debts of individuals. While the volume of NPL of corporate clients (businesses), which make up the bulk of problem loans, is almost not decreasing.
However, if we return to the tested banks (see table), then in 2023 they are confidently profitable, and the situation with the quality of assets of most of them is generally better than in the system. The only exceptions are state banks, which have an NPL share of up to 50-60%. But this is understandable: it is state banks that are most active in lending to businesses, which inevitably affects the state of their loan portfolio.
Also, all 20 banks that participate in stress tests regularly comply with N2 and N3 standards. Moreover, many of them have capital adequacy many times greater than that required by the NBU.
Values of N2, N3 standards and the share of NPL in banks’ loan portfolios
Bank H2 standard as of 11/1/2023 (%, not less than 10%) H3 standard as of 11/1/2023 (%, not less than 7%) NPL share as of 10/1/2023 Reliability rating PrivatBank 27.43 13.72 61.9 4 Oschadbank 18.88 9.46 48.8 4 Raiffeisen Bank 27 .81 17.94 14.3 4 Sense Bank 17.08 17.04 43.7 3 Universal Bank 27.66 18.65 10.1 3.5 FUIB 23.62 11.82 15.7 3.5 Ukreximbank 11.82 7.24 39.5 3 Ukrgasbank 16.2 13.06 30.9 3 OTP Bank 42.07 21.24 23 4 Ukrsibbank 63.99 32 17.5 4.5 Credit Agricole Bank 28.68 18.33 23 4 Kredobank 35.48 23.99 22 4 A-Bank 23.77 13.9 28.4 3 Taskombank 18.44 12.62 19.4 3 ProCredit Bank 23.06 13.42 13.6 3.5 Pivdenny 23 11.5 17.9 3 Bank Credit Dnepr 27.05 19.65 28. 3 3 Bank Vostok 23.47 15.83 11.2 3 MTB Bank 13.94 10.56 20.4 2.5 Pravex Bank 24.46 22.5 N .d. 3
NBU data, calculations
What happens after the stress tests? The next step that the National Bank intends to take will be to tighten the rules of the game in the banking market. The regulator has already announced that it is resuming previously suspended regulatory requirements and introducing new ones. All these processes will be stage-by-stage, but their start is scheduled for December 2023.
From December 29, 2023, banks will deduct 100% of non-core assets from their capital (currently only 75% of such assets are deducted). From January 1, 2024, when calculating the liquidity coverage ratio (LCR), banks will be able to take into account no more than 60% of funds in correspondent accounts with other banks (currently up to 80%). From January 1, 2024, the implementation of the internal capital adequacy assessment mechanism (ICAAP) will begin.. It is needed in order to maintain capital at a level sufficient to cover possible losses and risks inherent in the bank’s activities. During 2024, the requirements for the capital structure and capital adequacy standards of banks will be updated, and requirements for assessing the adequacy of internal liquidity (ILAAP) will be established.. This will generally improve approaches to risk management in banks.
All these NBU plans once again prove that stress tests are successful. If everything was bad for banks, on the verge of bankruptcy, the National Bank would hardly have increased regulatory pressure.
In addition, strengthening capitalization requirements and implementing updated risk management standards should make the banking system more resilient to adverse events in the future. Therefore, even if the war drags on for a long time, banks will be ready for this, will be able to maintain their stability and protect clients’ money.